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About Alphabet

Alphabet.

It’s not just the 26 letters (in the American alphabet, at least) that you aimlessly recited as little ones.

It just so happens to also be the parent company of one of the most famed, prized and largest technology companies in the entire world.

You know, Google, the company that practically owns over 90% of the search engine market on the World Wide Web?

Starting out in 1998, Larry Page and Sergey Brin, two computer scientists at Stanford collaborated on a project focused on improving the internet search engine landscape, hoping to attain more accurate results found in less time than the current (at the time) players in the market.

Since then, Google has become, well, the absolute behemoth that it is today, and it is worth noting that Google isn’t actually just Google.

On top of being home to the largest search engine platform on the face of the earth, one of my previous professors once likened Google to simply being one gigantic advertising platform, which I think is an excellent analogy, as the primary way in which Google itself generates revenue is by selling ad space through its main revenue engine, Google Ads, essentially selling space at or near the top following the submission of one’s search inquiry, as having a spot at or near the top of a page on Google easily leads to those searching becoming those finding and perhaps ultimately doing business with the company or organization that is buying the ad real estate from Google.

As a brief example, let’s say you and I own a small shoe shining venue in Columbia, Missouri and we haven’t been getting a lot of foot traffic recently. 

In attempts to increase our in-store traffic, the primary logical progression is that we would first have to get some traffic over the internet and given that practically everyone uses Google, one of our best likely options would be to pay a little to Google so that whenever someone from, say, in or around Columbia looks up “shoe shining” or “shoe shining near me” and happens to have their personal location settings on, as a result of paying Google Ads, we would be ranked towards the top of the page following that individual’s search, more than likely leading to them checking out our website and within the next few days actually coming into our store and making a purchase.

That is the primary way in which Google makes money.

Now, being that Google isn’t really just Google (although within the platform it does have plenty of fun and helpful features including Google Maps, Google Pay, Google Earth, along with a custom review platform that can be used by people coming in and out of our shoe shining business), it would be a good idea to briefly highlight the other companies under Alphabet’s corporate umbrella, some of which might actually surprise you.

Just to name a few of the larger subsidiaries, Google owns cybersecurity firm Mandiant, prominent fitness device platform Fitbit, business analytics software company Looker, in-home smart technology company Nest, navigation app Waze, advertising optimization platform DoubleClick, a platform that I use far too often by the name of YouTube along with one of the most pesky internet interrogators out there, reCAPTCHA, you know, when you try to access a certain page on a website and in order to verify you are a human you have to type out some convoluted sequence of numbers and letters that are incredibly hard to discern, you know, even for a human?

Don’t get us started.

Among other things, Google is also in the process of actively building out a cable and internet segment by the name of Google Fiber, which has already made its mark here in Austin, Texas, and, also, who in the world could forget about trusted free sidekicks such as Gmail and Google Drive, not to mention the company’s cross-browsing web platform, Google Chrome.

Through essentially all of these strategic, internet-based platforms, Google derives pretty much all of its revenues and it has become the trillion-dollar giant that it is today with its origins from where else but Silicon Valley, and you already know Google is staying on trend with the recent artificial intelligence (AI) boom, for example, with its generative artificial intelligence tool, Bard.

With all of this being said and while we have analyzed other trillion-dollar technology gargantuans in the past, let us now stroll through Google’s core financials and other pertinent figures so as to ultimately devise our opinion(s) regarding whether or not this company’s stock (NASDAQ: GOOGL) is worth buying now and holding forever.

Google’s stock financials

Weighing in at a mind boggling $1.7 trillion in terms of market capitalization with a share price of $132.45 along with an annually distributed dividend of zilch and a present price-to-earnings (P/E) ratio of 25.89, Google’s stock (NASDAQ: GOOGL), like many other technology giants this year finds itself up a great amount, up in the neighborhood of 40% over this last year’s span of time, leading us to believe that this is one of the primary reasons its shares are presently overvalued, however, given the current and likely continued trajectory of technology, particularly the segments within which Google and its subsidiaries operate within, we have our fair share of doubts that the company’s stock is fully priced in, as we can almost guarantee ourselves that through continued strategic execution, we presume there to be a great deal of growth and growth catalysts ahead of this company, both through in-house initiatives as well as through the externalities regarding the artificial intelligence (AI) landscape, of course, benefiting and really pushing a ginormous technology company such as Google to step up to the plate and innovate.

With that, it should also be noted that Google’s executives are tasked with tending to and taking care of around $365.2 billion in terms of total assets as well as approximately $109.1 billion in terms of total liabilities, according to the company’s balance sheet, which is frankly nothing short of an absolutely splendid balance sheet, especially for such a large company with operations spanning the entire globe, as it is very, very total asset-heavy, indicating, among other things, that it is in a great position to continue pursuing and growing internal initiatives (Google Fiber, as an example) as well as external opportunities, specifically in the context of hunting for strategic, value accretive mergers and acquisitions (M&A).

With a balance sheet breakdown such as this one, there isn’t all that much that Google cannot afford and we are glad to find that the technology company’s leadership has been prudent and net strategic with its available capital and other financial resources.

Moving right along to the condition of the company’s income statement, Alphabet (again, Google’s parent company) has been growing its year-over-year (YOY) revenue base at a notable rate, especially given just how large its operating base is to begin with, as its revenues in 2018 were reported as $136.8 billion, climbing to $161.8 billion during the following year, $182.5 billion in 2020, $257.6 billion in 2021, leading all the way up to its latest reported revenue figure of $282.8 billion, as reported at the end of 2022.

Again, just look at the base of which Google is operating off of, as essentially doubling one’s revenues within a handful of years and not being a small start-up (although that is still impressive in its own right) but one of the largest technology conglomerates in the world, heavily indicating that this company has been growing its product lines, services and offerings and perhaps also simultaneously raising prices here and there, which, especially within the realm of the search and online advertising, it most definitely can (for better or for worse, really), as Google, objectively speaking, has a great deal of pricing power.

Regarding the company’s cash flow statement, Alphabet has seemingly not had much of a problem with generating cash from its sales (revenues), as, for instance, with reference to the firm’s total cash from operations, since 2018 it has ranged between a sizable $47.9 billion (2018) to a high of $91.6 billion (2021), almost, like its recent annual revenues, rising each and every year, implying that Google has a knack for profitability and it is only becoming more and more natural.

Google’s stock fundamentals 

With the factor of profitability still in mind, it can be found that (according to the figures displayed on TD Ameritrade’s platform) Google’s trailing twelve month (TTM) net profit margin certainly backs up our jibber jabber regarding its relative ease in the arena of profitability, as the company’s TTM net profit margin is listed at 22.46% to the industry’s respective average of 18.30%, which, sure, is somewhat comparable, however, we feel as though Google was always sort of destined to have the edge in this respect, as, once again, it is by far the largest player within the search category.

We are happy to find that the company’s TTM net profit margin is greater than that of the industry’s average, nevertheless, as even though Google is the top dog in this space alone (again, among others), it does go up against some fairly stiff, solid competitors, including but not limited to Microsoft’s search engine Bing, Yahoo!, Chinese-owned Baidu as well as other state-side platforms such as more privacy-centric search platforms such as DuckDuckGo.

Yes, Google still dominates, but its competitors should surely not be ruled out or dismissed.

Lastly, as it relates to the company’s core TTM returns on both assets and investments, Google’s figures (again, as displayed and found on TD Ameritrade’s platform) have shined through with respect to how they measure up against the average of the competition, with, for example, the company’s TTM return on investment pegged at 22.14% to the industry’s respective average of 19.90%, not to mention the company’s TTM return on assets displayed as 17.68% to the industry’s listed average of 16.15%, both sets of figures telling us that Google’s management has done a really good job at being efficient and intentional regarding the way(s) in which it deploys its capital, seemingly planting down the right investments and combining and operating the right assets so as to maintain and, really, further the company’s operational prowess, which, evidently, are great signs.

Should you buy Google stock?

I feel like everyone sort of knows of or has at least heard of Google at some point or another, including ourselves, however, I have absolutely no shame or embarrassment in admitting that I have learned a lot about this company that I didn’t know before.

For starters, while I did know that Google owned YouTube, Mandiant, Waze and basically the entire online search ecosystem (but the Federal Trade Commission already knew that), there were a few other companies that I had no idea Alphabet owned outright, and I also did not know just how sublime the company’s balance sheet was going to be in its ever so pleasant total asset-heavy state, not to mention the fact that Google’s year-over-year revenues have been growing at a tremendous rate given the relative base off of which it is operating off of, its cash flows are pristine and relative margin and return metrics maintain competitive postures as well.

Yet another inherent tailwind we think Alphabet will continue enjoying is the continual rise and implementation of AI and also, the very fact that this company has carved out an exceptional moat for itself within the online search space, also diving into similar but different industries that are also largely resistant to recessionary pressures, a good example being Google’s growing cable and internet/Wi-Fi business segment, Google Fiber, as regardless of the prevailing state of the economy and consumer’s budgets, people are either not likely to cut off their internet, as this is hardly a discretionary expense anymore, and many might not even (sadly) have the choice, say, if they reside within an apartment complex and are forced to pay for internet and, at least in our neck of the woods, it seems as though more and more apartment complexes and respective property managers are signing up with Google Fiber.

While the company’s stock (NASDAQ: GOOGL) is objectively overvalued during the time of this publication, this is definitely one of the instances in which we think paying a modest premium is justified given the aforementioned figures and industry tailwinds benefiting this company and the landscape(s) in which it operates, thus, the “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.